Momentum trade ends in '50-car pileup'

Boom! Zap! Crash! The sell-off in the Nasdaq composite index in recent trading sessions has been one of those “wrecks” that you can’t keep your eyes off.

Here’s how Gary Kaltbaum, president of money-management firm Kaltbaum Capital Management, describes the carnage of imploding biotech and Internet stocks, once high-flying “growth” names in the Nasdaq composite, that have come crashing down to earth:

“The best we can describe what we have been recently seeing in ‘growth-land’ is a 50-car pileup,” Kaltbaum told clients in a morning research note.

“They are now going to trade all over the map,” Kaltbaum tells USA TODAY. “Big swings, but trend ultimately is down for now.”

He says it’s not a surprise that stocks in the Dow Jones industrial average are holding up better, at least for now. (Heading into Monday’s session, the Dow was down just 1% from its high, vs. a 5.3% deficit for the Nasdaq.)

“It is absolutely classic,” says Kaltbaum, “that the Dow-types act better as this ‘always-invested’ money has to find a place (to park cash). It is no accident that (old, established tech names like) Oracle, Microsoft, IBM and Hewlett-Packard have had a bid as the ‘riskier’ tech money finds a place to hide. This will only last so long. Many names are already down 30% to 50%. Names we have highlighted as being priced off the charts are getting smoked. These are not just breaks but big breaks and should be sold up on any bounces and not bought down.”

On the near-term outlook for those momentum stocks in the Nasdaq that have gotten creamed: “This feels like the beginning and not the end of a move out of these areas,” says Kaltbaum.

Will the selling spill over to the rest of the market?

“We would suggest that all the other major indices are poised to put in tops also,” warns Kaltbaum. But, “the process takes time. We believe we are now farther along in that process as the five- year, Fed-induced bull looks to be on borrowed time.”

The Federal Reserve’s massive stimulus programs, of course, have been credited as a big reason stocks have performed so well the past five years.